A bank can reduce the impact of a default risk by
A)having assets with the same time to maturity.
B)making risky loans at low interest rates.
C)making safe loans at high interest rates.
D)diversifying its portfolio.

Question

Quizplus · Accepted Answer

Diversifying a portfolio means spreading the risk across different types of assets and borrowers, which can help reduce the impact of default risk. By having a mix of safe and risky loans, as well as assets with different maturities, a bank can reduce the overall risk and potential losses if any individual borrower defaults. Option A may reduce interest rate risk, but it does not directly address default risk. Options B and C, while potentially attracting different types of borrowers, may actually increase default risk if the bank is not careful in assessing the creditworthiness of those borrowers.

A Bank Can Reduce the Impact of a Default Risk